Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Jiangxi Special Electric MotorLtd
How Much Debt Does Jiangxi Special Electric MotorLtd Carry?
As you can see below, at the end of March 2024, Jiangxi Special Electric MotorLtd had CN¥1.30b of debt, up from CN¥587.9m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥811.1m, its net debt is less, at about CN¥492.5m.
How Strong Is Jiangxi Special Electric MotorLtd's Balance Sheet?
We can see from the most recent balance sheet that Jiangxi Special Electric MotorLtd had liabilities of CN¥2.11b falling due within a year, and liabilities of CN¥850.4m due beyond that. On the other hand, it had cash of CN¥811.1m and CN¥1.26b worth of receivables due within a year. So its liabilities total CN¥891.9m more than the combination of its cash and short-term receivables.
Of course, Jiangxi Special Electric MotorLtd has a market capitalization of CN¥13.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jiangxi Special Electric MotorLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Jiangxi Special Electric MotorLtd had a loss before interest and tax, and actually shrunk its revenue by 59%, to CN¥2.4b. To be frank that doesn't bode well.
Caveat Emptor
Not only did Jiangxi Special Electric MotorLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥546m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥478m. So to be blunt we do think it is risky. For riskier companies like Jiangxi Special Electric MotorLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About SZSE:002176
Jiangxi Special Electric MotorLtd
Researches, develops, produces, and sells motor and lithium products in China.
Flawless balance sheet with weak fundamentals.
